DBRS Morningstar Confirms Ratings on Nestlé S.A. and Nestlé Capital Canada Ltd. with Stable TrendsConsumers
DBRS Ratings Limited (DBRS Morningstar) confirmed Nestlé S.A.’s (Nestlé or the Company) Issuer Rating at AA (low) and Nestlé Capital Canada Ltd.’s Commercial Paper (CP) rating at R-1 (middle). All trends are Stable. The confirmations reflect Nestlé's continued solid operating performance during the reopening phase of the Coronavirus Disease (COVID-19) pandemic, evidenced by its strong retail sales driven by coffee and petcare products as well as the recovery in out-of-home channels. The Stable trends also reflect DBRS Morningstar's view that the Company is well positioned to navigate inflationary pressures within the current rating category.
KEY RATING CONSIDERATIONS
Despite inflationary pressures, Nestlé’s earnings profile should continue to support the current rating category based on its strong global brands, product and geographic diversification, and continued focus on efficiency, portfolio optimisation, and well as strong free cash flow (FCF) generation capacity and relative resilience to economic cycles. DBRS Morningstar expects organic growth to continue to be supported by the Company's efforts to (1) refocus its portfolio on higher-growth categories and regions; (2) address underperforming or nonstrategic businesses; (3) grow its ecommerce business; and (4) actively manage its portfolio. DBRS Morningstar believes that Nestlé will continue its strategy of strategic acquisitions, but does not anticipate that there will be any significant divestments in the near term. Accordingly, DBRS Morningstar expects organic growth to moderate to around 5% to 6% per year over the near to medium term. DBRS Morningstar also expects EBIT margins to remain stable between 17.0% and 17.5% despite inflationary pressures on input, shipping, and packaging costs, given Nestlé’s ability to pass on at least some of the inflation-driven cost increases through pricing and lower pandemic-related expenses. As such, DBRS Morningstar forecasts the Company's EBIT to grow to over CHF 15.1 billion in the near term.
In terms of its financial profile, DBRS Morningstar expects Nestlé to continue to use cash on hand, FCF, proceeds from divestments, and incremental debt to execute its share buyback program. On 7 December 7, 2021, Nestlé announced that it intends its intention to reduce its stake in L’Oréal S.A. to 20.1% (from 23.3%) for proceeds of CHF 9.3 billion to help fund a new CHF 20 billion share buyback program starting in January 2022, which will replace to replace the existing programme. Consequently, DBRS Morningstar does not expect Nestlé’s financial metrics to improve in the near term (i.e., from a net debt-to-EBITDA level of 2.13 times (x) at year-end 2021 (the last 12 months ended 30 June 2021) versus previous years of 1.74x at year-end 2020 and 1.37x at year-end 2019).
DBRS Morningstar notes that some of Nestlé’s financial metrics have weakened beyond what DBRS Morningstar views as appropriate for the current rating (specifically net debt-to-EBITDA ratio below 2.0x). That said, because Nestlé’s other ratios (including cash flow-to-net debt and EBITDA coverage) have remained strong (above 30% and 7.0x, respectively) in addition to the Company’s superior business risk profile, DBRS Morningstar considers Nestlé’s overall credit risk profile to still be commensurate with the AA (low) rating category. Nevertheless, if the Company’s financial metrics (including the net debt-to-EBITDA ratio) remain considerably above 2.0x on a sustained basis and/or there is a weakening of Nestlé’s cash flow-to-net debt and EBITDA coverage to below 30% and 7.0x, respectively, as a result of aggressive financial management and/or weaker-than-expected operating performance, DBRS Morningstar could take a negative rating action. Additionally, DBRS Morningstar notes that weaker-than-expected operating performance causing a shift in the Company's business risk profile could result in the requirement to maintain stronger credit metrics to support the same rating. Although unlikely, if Nestlé returns to a financial policy consistent with the AA rating level (i.e., net debt-to-EBITDA significantly below 1.50x on a sustained basis) while maintaining a solid operating performance, DBRS Morningstar could take a positive rating action.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Swiss francs unless otherwise noted.
The principal methodology is “Rating Companies in the Consumer Products Industry” (26 July 2021), https://www.dbrsmorningstar.com/research/382072/rating-companies-in-the-consumer-products-industry. Other applicable methodologies include “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (31 May 2021), https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support; “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (9 March 2021), https://www.dbrsmorningstar.com/research/375001/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers; and “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (3 February 2021), https://www.dbrsmorningstar.com/research/373262.
The primary sources of information used for this rating include publicly available information from the rated entity’s website, including the 2021 Half-Year Report, 2020 Annual Report, quarterly results, Pre 9M-2021 Analysts’ Consensus Estimates Publication, and some information directly provided by the Company. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/389778.
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Anil Passi, Managing Director
Initial Rating Date: 15 August 2000
Last Rating Date: 21 December 2020
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-- “Rating Companies in the Consumer Products Industry” (26 July 2021), https://www.dbrsmorningstar.com/research/382072;
-- “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (31 May 2021), https://www.dbrsmorningstar.com/research/379424;
-- “DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers” (9 March 2021), https://www.dbrsmorningstar.com/research/375001;
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.
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- Rating Companies in the Consumer Products Industry (Archived) / July 26, 2021
- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (Archived) / May 31, 2021
- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (Archived) / March 9, 2021
- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (Archived) / February 3, 2021